US Dollar Reserve-Currency Status Under Pressure Amid Currency Market Interventions

The US dollar's reserve-currency advantage is under pressure, according to recent events. To support the Japanese yen, Washington intervened in currency markets, but instead of buying yen with dollars, they used euros from their reserves.

This unusual transaction may point towards a deeper concern - Treasury Secretary Scott Bessent and other US officials worried that selling dollar securities would put pressure on the long end of the Treasury market. UC Berkeley economist Barry Eichengreen argued in the Financial Times that this could be why Washington didn't want to sell dollars directly.

The problem is that weakening demand for Treasury securities means lower bond prices and higher yields, which would increase borrowing costs for the US government. Japan's situation makes the dilemma even clearer: when it needs to strengthen the yen, it can sell US Treasury securities and receive dollars, but this creates a headache for Washington.

Japan has indicated that it will use the Federal Reserve's Foreign and International Monetary Authorities (FIMA) Repo Facility for future currency-support operations. This facility gives eligible foreign monetary authorities another option: instead of outright selling Treasuries, they can pledge those securities as collateral and obtain dollars from the Fed.